2015 Annual Financial Report

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Annual Financial Report For the Year Ended December 31, 2015

Annual Financial Report Elk River Utilities Elk River, Minnesota For the Year Ended December 31, 2015

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ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2015

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ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA TABLE OF CONTENTS FOR THE YEAR ENDED DECEMBER 31, 2015 Page No. INTRODUCTORY SECTION Public Utilities Commission and Administration

5

FINANCIAL SECTION Independent Auditor’s Report Management’s Discussion and Analysis

9 13

Financial Statements Statement of Net Position Statement of Revenues, Expenses and Changes in Net Position Statement of Cash Flows Notes to the Financial Statements

20 23 24 27

Required Supplementary Information Schedule of Funding Progress for the Retiree Health Plan Schedule of Employer’s Share of Public Employees Retirement Association Net Pension Liability General Employees Retirement Fund Schedule of Employer’s Public Employees Retirement Association Contributions General Employees Retirement Fund Supplementary Information Schedule of Operating Revenues and Expenses Electric Fund Summary of Operations and Unaudited Statistics Water Fund Summary of Operations and Unaudited Statistics

48 48 48

50 52 54

OTHER REPORT Independent Auditor’s Report on Minnesota Legal Compliance

59

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INTRODUCTORY SECTION ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA

FOR THE YEAR ENDED DECEMBER 31, 2015

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ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA PUBLIC UTILITIES COMMISSION AND ADMINISTRATION DECEMBER 31, 2015 ` Name

Title

John Dietz Allan Nadeau Daryl Thompson

Chairperson Vice-Chairperson Trustee ADMINISTRATION

Name

Title

Troy Adams Theresa Slominski Eric Volk Mark Fuchs Mike O'Neill Tom Sagstetter Michelle Canterbury Jennie Nelson

General Manager Finance and Office Manager Water Superintendent Line Superintendent Technical Services Superintendent Conservation and Key Accounts Manager Executive Administrative Assistant Customer Service Manager

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FINANCIAL SECTION ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA

FOR THE YEAR ENDED DECEMBER 31, 2015

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INDEPENDENT AUDITOR’S REPORT

Public Utilities Commission Elk River Municipal Utilities Elk River, Minnesota Report on the Financial Statements We have audited the accompanying financial statements of the Elk River Municipal Utilities (the Utilities) of the City of Elk River, Minnesota (the City), as of and for the year ended December 31, 2015, and the related notes to the financial statements, as listed in the table of contents. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Utilities preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Utilities internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Utilities of the City as of December 31, 2015, and the changes in financial position and cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 1B, the financial statements present only the Electric and Water enterprise funds and do not purport to, and do not present fairly the financial position of the City as of December 31, 2015, the changes in its financial position, or, where applicable, its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter.

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Other Matters Change in Accounting Standards As described in Note 6 to the financial statements, the Utilities adopted the provisions of Governmental Accounting Standard Board (GASB) Statement No. 68, Accounting and Financial Reporting for Pensions - an Amendment of GASB Statement No. 27 and Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date - an Amendment of GASB Statement No. 68, for the year ended December 31, 2015. Adoption of the provisions of these statements results in significant change to the classifications of the components of the financial statements. Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management’s Discussion and Analysis Page 13 and the Schedule of Employer’s Shares of the Net Pension Liability, the Schedule of Employer’s Contributions and the Schedule of Funding Progress for Other Post-Employment Benefit Plan starting on page 48 be presented to supplement the basic financial statements. Such information, although not a part of the financial statements, is required by the Government Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Utilities’ financial statements as a whole. The introductory section and supplemental information listed in the table of contents are presented for the purpose of additional analysis and are not a required part of the financial statements of the Utilities. The supplemental information, except for the portion marked “unaudited” on which we express no opinion, has been subjected to the auditing procedures applied in the audits of the financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. The introductory section and the supplemental information marked “unaudited” have not been subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we do not express an opinion or provide any assurance on them.

ABDO, EICK & MEYERS, LLP Minneapolis, Minnesota March 31, 2016

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Management’s Discussion and Analysis This section of the Elk River Municipal Utilities (the Utilities) of the City of Elk River, Minnesota annual financial report presents our analysis of the Utilities’ financial performance during the fiscal year that ended December 31, 2015. Please read it in conjunction with the financial statements, which follow this section. Financial Highlights •

The assets and deferred outflows of resources of the Utilities exceeded its liabilities and deferred inflows of resources at the close of the most recent fiscal year by $55,885,878 (net position). Net Position increased by $2,531,445 or 4.5 percent.

•

The Utilities’ cash balance at the close of the current fiscal year was $17,542,791.

•

Electric usage overall was up an average of 3 percent. Residential usage increased 1.9 percent, Commercial usage increased 2.9 percent, and Industrial usage increase 3.2 percent.

•

Water usage overall was up an average of less than 1 percent, at 0.61 percent from the prior year. Residential usage decreased 6 percent, and Commercial usage increased 7 percent.

Overview of the Financial Statements This annual report consists of three parts; Management’s Discussion and Analysis, Financial Statements, and Supplementary Information. The Financial Statements also include notes that explain in more detail some of the information in the financial statements. Required Financial Statements The financial statements of the Utilities report information about the Utilities using accounting methods similar to those used by private sector companies. These statements offer short-term and long-term financial information about its activities. The Statements of Net Position includes all of the Utilities’ assets and liabilities and provides information about the nature and amounts of investments in resources (assets) and the obligations to Utilities’ creditors (liabilities). It also provides the basis for computing rate of return, evaluating the capital structure of the Utilities and assessing the liquidity and financial flexibility of the Utilities. All of the current year’s revenues and expenses are accounted for in the Statements of Revenues, Expenses and Changes in Net Position. This statement measures the success of the Utilities’ operations over the past year and can be used to determine whether the Utilities’ has successfully recovered all its costs through its user fees and other charges, profitability, and credit worthiness. The final required financial statement is the Statements of Cash Flows. The primary purpose of this statement is to provide information about the Utilities’ cash receipts and cash payments during the reporting period. The statement reports cash receipts, cash payments and net changes in cash resulting from operations, investing and financing activities and provides answers to such questions as where did cash come from, what was cash used for and what was the change in the cash balance during the reporting period.

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Financial Analysis of the Utilities Our analysis of the Utilities begins on page 20 in the Financial Section. One of the most important questions asked about the Utilities’ finances is “Is the Utilities as a whole better off or worse off as a result of this year's activities?” The Statements of Net Position, and the Statements of Revenues, Expenses and Changes in Net Position report information about the Utilities’ activities in a way that will help answer this question. These two statements report the net position of the Utilities and changes in this net position. You can think of the Utilities’ net position (the difference between assets and liabilities) as one way to measure financial health or financial position. Over time, increases or decreases in the Utilities’ net position is one indicator of whether its financial health is improving or deteriorating. However, you will need to consider other non-financial factors such as changes in economic conditions, population growth, zoning, and new or changed government legislation. Net position. To begin our analysis, a summary of the Utilities’ Statements of Net Position is presented in Table A-1. As can be seen from the Table, net assets and deferred inflows increased $2,531,445 to $55,885,878 in fiscal 2015 up from $53,354,433 in fiscal 2014.

TABLE A-1 Condensed Statement of Net Position

Assets Current and other Capital Total assets Total deferred outflows Liabilities Current Non-current Total liabilities Total deferred inflows Net position Net investment in capital assets Restricted for debt service Unrestricted Total net position

* 2015

2014

Increase (Decrease)

$ 21,848,337 48,151,150

$ 20,288,649 48,254,028

69,999,487

68,542,677

1,456,810

360,603

67,284

293,319

5,408,917 8,557,562

5,269,454 7,284,918

139,463 1,272,644

13,966,479

12,554,372

1,412,107

507,733

-

507,733

41,216,712 490,500 14,178,666

40,218,203 490,500 15,346,886

$ 55,885,878

$ 56,055,589

$

1,559,688 (102,878)

998,509 (1,168,220) $

(169,711)

*GASB Statement No. 68 was implemented for the year ended December 31, 2015 and required a $2,701,156 restatement of beginning net position. Prior year amounts were not restated causing a variance in ending net position at December 31, 2014 and beginning net position on January 1, 2015. See financial statement Note 6.

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Water and electric rates. Electric - The latest increase in the Utilities’ electric rates was effective January 2015. There was no electric rate increase in 2016. The monthly base charges are based upon the type of service. The monthly charges are $12.00 for residential, $20.00 for commercial, and $60.00 for industrial customers. In addition to the base charges the residential rate is $.1360/KWh for May-September usage, and $.1205/KWh for October-April usage; the commercial rate is $.1304/KWh for MaySeptember usage, and $.1087/KWh for October-April usage; the industrial rate is $.0649/KWh energy charge year round with a demand charge of $16.94/KW May-September, and $11.99/KW for October-April. Water - The Utilities’ latest increase in residential and commercial rates was effective January 2016. The monthly base charge for residential customers is $8.64 per month. In addition to the base charge, the Utilities currently charges its residential customers $1.72 per 1,000 gallons up to 9,000 gallons, $3.50 per 1,000 gallons between 9,000 gallons and 15,000 gallons, and $4.00 per 1,000 gallons for usage above 15,000 gallons. Commercial customer’s base charges are based upon meter size, and range from $10.37 to $109.53. An irrigation meter is $46.11 for every month the meter is utilized. There is also a charge per thousand gallons, the same tiers as the residential rates of $1.72, $3.50, and $4.00, except the graduation from the lower tier to the higher tier(s) is calculated based on previous consumption. The Utilities requires payment of all utility bills to be paid by the due date stated on the monthly bill. A ten percent penalty is assessed for payments not received by the due date. The Utility may discontinue service of a customer not complying with the disconnect policy of the Utility after receiving a written disconnect notice. Residential and Commercial/Industrial single phase electric customers that have their service discontinued will be charged a minimum of $50.00 to have their service reconnected. Commercial/Industrial three phase electric customers that have their service discontinued will be charged a minimum of $150.00 to have their service reconnected. Residential and Commercial/Industrial water customers that have their water shut-off will be charged a fee of $100.00 to have their water turned on/reconnected. There are no reconnections after 3:30pm and payments for reconnection /turn on are not accepted at the property site; payments must be made prior to dispatching reconnection. Customers can come in to the office between the hours of 8:00am and 4:30pm to make the payment by cash, money order or credit card; or pay online or by phone with a credit card. The Utilities abides by the Cold Weather Rules. Deposit policy. Per our Deposit Policy, the Utility collects social security numbers from new accounts and utilizes a credit risk assessment tool called “Online Utility Exchange” to determine if a deposit is necessary as a proactive measure to try and reduce uncollectible accounts. The amount of the deposit required will depend on the risk identified with the customer. For residential customers, if there is a 68 percent or higher probability of non-default and no negative history (no disconnection for non-payment or late payments two or more times within 12 months) there is no deposit required. If there is a lower than 68 percent probability of nondefault, a deposit appropriate to the services supplied will be required before utility service will be extended. If the customer chooses not to provide a social security number, the deposit is automatically required. Residential deposit amounts are $100 for apartments, $100 for homes with water and sewer, $150 for homes with electric only services, and $250 for homes with all services (electric, water, and sewer). For commercial and industrial customers, a service agreement would need to be signed that identifies the guarantor of their business and the guarantor’s social security number. Generally, a deposit of 2 times the estimated highest monthly bill will be required, with a minimum deposit of $250 for non-demand customers, and $1,000 for demand customers. The deposit shall be in the form of a cash deposit, or an irrevocable letter of credit. The irrevocable letter of credit will be renewed as required and failure to do so will result in a charge equal to the amount of the letter of credit applied to the monthly utility bill. Deposits will be retained until the account is closed. The deposit will be returned to the customer within 45 days of termination of service, provided that the customer has paid in full all amounts due on the account. The appropriate interest will be applied to the account per state statutes.

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Statements of revenues, expenses and changes in net position. While the Statements of Net Position shows the change in financial assets/deferred outflows and liabilities/deferred inflows, the Statements of Revenues, Expenses and Changes in Net Position, provides answers as to the nature and source of these changes. As can be seen in Table A-2, revenues in excess of expenses was the main source of the increase in net position of $2,531,445 in fiscal 2015. A closer examination of the individual categories affecting the source of changes in net position is discussed below:

TABLE A-2 Condensed Statements of Revenues, Expenses and Changes in Net Position

Revenues Operating Nonoperating Total revenues Expenses Operating Nonoperating Total expenses Income before contributions and operating transfers Capital contributions - developer infrastructure and connection fees Capital contributions of asset from City Transfers from other City funds Transfers to other City funds Change in net position Net position, January 1 Net position, December 31

* 2015

2014

$ 34,754,259 576,984

$ 33,515,012 494,455

35,331,243

34,009,467

32,310,449 172,912

31,742,912 284,129

567,537 (111,217)

32,483,361

32,027,041

456,320

2,847,882 253,934 189,669 94,703 (854,743)

Increase (Decrease) $

1,321,776

1,982,426 375,329 175,091 329,490 (822,835)

2,531,445 53,354,433

2,039,501 54,016,088

$ 55,885,878

$ 56,055,589

1,239,247 82,529

865,456 (121,395) 14,578 (234,787) (31,908) 491,944 (661,655) $

(169,711)

*GASB Statement No. 68 was implemented for the year ended December 31, 2015 and required a $2,701,156 restatement of beginning net position. Prior year amounts were not restated causing a variance in ending net position at December 31, 2014 and beginning net position on January 1, 2015. See financial statement Note 6. Revenues. Table A-2 shows that operating revenue increased by 3.7 percent in 2015 for the Electric and Water Departments combined. The Electric Department operating revenue was impacted by the territory acquisition in September and October adding approximately 800 residential customers and 130 commercial customers. The additional revenue resulting from these new customers was $314,754. Nonoperating revenue is comprised of transmission rebate revenue in the Electric Department, and water tower lease revenue in the Water Department, as well as connection fees in both departments. Regarding transmission rebates, in 2007 the Electric Utility partnered with Midwest Municipal Transmission Group (MMTG) in order to have our transmission assets recognized in the Midwest Independent Transmission System Operator (MISO) market. In doing so, our transmission assets generate a revenue rebate, which in turn helps keep our rates down. In 2015, rebates received from our 2013 filings were approximately $5,500 per month. 2014 had a sizable catch up distribution for the Brookings transmission line, which was not repeated in 2015.The Water Department is receiving lease revenue from Sprint and Verizon for antennas on the water towers. In 2015 this amount was approximately $158,000, and will continue for the duration of the multi-year contracts. Water Connection Fees decreased approximately $100,000, and Electric Connection Fees increased approximately $13,000. 2014 Connection Fees were higher with the resurgence in new construction as the economy had begun rebounding. Total expenses. In reviewing total expenses in Table A-2 you will notice that there was an increase of 1.4 percent overall, with both electric and water departments having marginal increases. Purchased Power is the biggest electric department expense and it was up just under 1 percent.

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Capital Assets and Debt Administration Capital assets. The Utilities’ investment in capital assets for its business-type activities as of December 31, 2015 amounts to $48,151,150 (net of accumulated depreciation). This investment in capital assets includes land, buildings, improvements and equipment. A table summarizing the balances by fund follows:

2015 Land Land improvements Buildings Machinery and equipment Infrastructure Construction in progress

$

Total

361,351 8,000 2,015,126 1,626,892 43,949,775 190,006

$ 48,151,150

Increase (Decrease)

2014 $

361,303 8,936 2,096,195 1,582,080 43,389,804 815,710

$

48 (936) (81,069) 44,812 559,971 (625,704)

$ 48,254,028

$

(102,878)

The total decrease in the Utilities’ investment in capital assets for the current fiscal year was 0.2 percent. Major capital asset events during the current fiscal year included the following: •

The Electric Department acquired additional territory that included approximately 1,000 customers, increasing Infrastructure.

•

Construction in progress decreased as projects started in the prior year were completed and there were not as many carryover projects for 2015.

Additional information on the Utilities’ capital assets can be found in Note 2B starting on page 34 of this report. Long-term debt. At year end, the Utilities had $7,369,182 in long-term debt down from $8,460,327 in fiscal 2014. More detailed information about the Utilities’ long-term liabilities can be found in Note 2C starting on page 35 and below:

2015 G.O. revenue bonds Revenue bonds Unamortized premium on bonds Promissory note Compensated absences payable OPEB liability Total

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Increase (Decrease)

2014

$

2,535,000 2,985,000 65,234 1,408,368 312,539 63,041

$

2,835,000 3,585,000 83,233 1,599,876 302,286 54,932

$

(300,000) (600,000) (17,999) (191,508) 10,253 8,109

$

7,369,182

$

8,460,327

$

(1,091,145)

Economic Factors and Next Year’s Budgets and Rates The increased emphasis toward renewable energy and away from coal-based energy, the challenge to reduce energy and water consumption while still maintaining the existing infrastructure and the smart grid developments are all factors that point to potential increased cost in the coming years. It is the Utilities’ goal to not have to rely on increasing rates to meet those increases but continue to look for ways to increase efficiencies and reduce costs, while providing excellent customer service. Elk River Municipal Utilities’ mission is to provide safe, cost-effective, reliable, quality utilities in an environmentally and financially responsible manner. We have met that mission in our customer service delivery and our successful financial results, and will continue to strive to meet that mission in the future. Contacting the Utilities Financial Manager This financial report is designed to provide our citizens, customers, investors and creditors with a general overview of the Utilities’ finances and to demonstrate the Utilities’ accountability for the money it receives. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to Theresa Slominski, Elk River Municipal Utilities, PO Box 430, Elk River, Minnesota 55330-0430 or at 13069 Orono Parkway in Elk River, MN.

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FINANCIAL STATEMENTS ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA

FOR THE YEAR ENDED DECEMBER 31, 2015

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ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA STATEMENT OF NET POSITION DECEMBER 31, 2015 Electric ASSETS CURRENT ASSETS Cash and temporary investments Receivables Accrued interest Accounts, net of allowance Special assessments Other receivables Due from other City funds Inventories Prepaid expenses

$ 12,685,126

TOTAL CURRENT ASSETS CAPITAL ASSETS Land Land improvements Buildings Equipment and machinery Infrastructure Construction in progress CAPITAL ASSETS, COST LESS ACCUMULATED DEPRECIATION TOTAL CAPITAL ASSETS, NET OTHER ASSETS Restricted cash TOTAL ASSETS DEFERRED OUTFLOWS OF RESOURCES Deferred charges on refunding Deferred pension resources TOTAL DEFERRED OUTFLOWS OF RESOURCES

The notes to the financial statements are an integral part of this statement.

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Water

$

Total

4,367,165

$ 17,052,291

2,445 2,593,000 6,522 63,820 10,020 991,563 178,779

611 116,719 72,876 2,159 223,992 14,015 29,025

3,056 2,709,719 79,398 65,979 234,012 1,005,578 207,804

16,531,275

4,826,562

21,357,837

265,071 23,389 2,883,212 3,043,801 42,756,591 125,997

96,280 821,203 374,326 33,709,666 64,009

361,351 23,389 3,704,415 3,418,127 76,466,257 190,006

49,098,061 (21,846,450)

35,065,484 (14,165,945)

84,163,545 (36,012,395)

27,251,611

20,899,539

48,151,150

490,500

-

490,500

44,273,386

25,726,101

69,999,487

47,355 272,949

11,809 28,490

59,164 301,439

320,304

40,299

360,603

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA STATEMENT OF NET POSITION - CONTINUED DECEMBER 31, 2015 Electric CURRENT LIABILITIES Accounts payable Salaries and benefits payable Accrued interest payable Due to other City funds Due to other governments Customer deposits payable Unearned revenue Compensated absences - current portion Notes payable - current portion Bonds payable - current portion

$

TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Net other postemployment benefits liability Compensated absences - less current portion Notes payable - less current portion Bonds payable, net - less current portion Net pension liability TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES DEFERRED INFLOWS OF RESOURCES Deferred pension resources NET POSITION Net investment in capital assets Restricted for debt service Unrestricted TOTAL NET POSITION

The notes to the financial statements are an integral part of this statement.

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2,366,994 78,030 49,892 659,433 140,014 489,476 153,002 194,307 692,000

Water $

94,124 14,173 26,563 23,034 2,976 89,053 86,291 16,555 233,000

Total $

2,461,118 92,203 76,455 682,467 142,990 578,529 86,291 169,557 194,307 925,000

4,823,148

585,769

5,408,917

63,041 130,528 1,214,061 3,024,375 2,243,115

12,454 1,635,859 234,129

63,041 142,982 1,214,061 4,660,234 2,477,244

6,675,120

1,882,442

8,557,562

11,498,268

2,468,211

13,966,479

459,746

47,987

507,733

22,174,223 490,500 9,970,953

19,042,489 4,207,713

41,216,712 490,500 14,178,666

$ 32,635,676

$ 23,250,202

$ 55,885,878

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ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION FOR THE YEAR ENDED DECEMBER 31, 2015 Electric OPERATING REVENUES Charges for services Security systems LFG project Generation credit Connection maintenance Customer penalties

$ 31,629,131 251,488 1,075,148 (805,579) 163,195 238,339

TOTAL OPERATING REVENUES OPERATING EXPENSES Purchased power Production Distribution Depreciation Customer accounts General and administrative TOTAL OPERATING EXPENSES OPERATING INCOME (LOSS)

TOTAL NONOPERATING REVENUES (EXPENSES) INCOME (LOSS) BEFORE CONTRIBUTIONS AND TRANSFERS CAPITAL CONTRIBUTIONS DEVELOPER INFRASTRUCTURE AND CONNECTION FEES CONTRIBUTION OF ASSETS FROM CITY TRANSFERS FROM OTHER CITY FUNDS TRANSFERS TO OTHER CITY FUNDS CHANGE IN NET POSITION NET POSITION, JANUARY 1 AS RESTATED (NOTE 6) NET POSITION, DECEMBER 31

The notes to the financial statements are an integral part of this statement.

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$

2,141,096 42,543 18,898

Total $ 33,770,227 251,488 1,075,148 (805,579) 205,738 257,237

32,551,722

2,202,537

34,754,259

22,034,307 928,923 1,402,046 1,922,359 856,076 2,752,443

465,181 168,132 1,131,110 67,487 582,385

22,034,307 1,394,104 1,570,178 3,053,469 923,563 3,334,828

29,896,154

2,414,295

32,310,449

2,655,568

NONOPERATING REVENUES (EXPENSES) Interest income Miscellaneous revenue Interest expense and other Gain (loss) on sale of capital assets

Water

(211,758)

2,443,810

95,533 279,487 (116,676) 8,899

24,666 177,298 (65,135) -

120,199 456,785 (181,811) 8,899

267,243

136,829

404,072

2,922,811

(824,743)

(74,929)

253,934 189,669 94,703 (30,000)

2,847,882

253,934 189,669 94,703 (854,743)

2,098,068

433,377

2,531,445

30,537,608

22,816,825

53,354,433

$ 32,635,676

$ 23,250,202

$ 55,885,878

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2015 Electric CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers and users Other operating cash receipts Payments to suppliers Payments to employees

$ 32,460,951 326,880 (25,682,803) (2,003,949)

NET CASH PROVIDED BY OPERATING ACTIVITIES

Water $

5,101,079

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Transfers from City Transfers to City (Increase) decrease in due from other City funds Increase (decrease) in due to other City funds NET CASH PROVIDED (USED) BY NONCAPITAL FINANCING ACTIVITIES CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Acquisition of capital assets Proceeds from sale of capital assets Proceeds from connection fees Principal payments on revenue bonds Interest paid on revenue bonds Principal payments on promissory note NET CASH USED BY CAPITAL AND RELATED FINANCING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Interest on investments NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, JANUARY 1

2,218,848 252,022 (777,734) (530,331)

1,162,805

Total $ 34,679,799 578,902 (26,460,537) (2,534,280)

6,263,884

(824,743) (1,730) 47,353

94,703 (30,000) 234,787 5,083

94,703 (854,743) 233,057 52,436

(779,120)

304,573

(474,547)

(2,345,925) 8,899 (672,000) (136,360) (191,508)

(764,695) 253,934 (228,000) (67,079) -

(3,110,620) 8,899 253,934 (900,000) (203,439) (191,508)

(3,336,894)

(805,840)

(4,142,734)

93,451

24,146

117,597

1,078,516

685,684

1,764,200

12,097,110

3,681,481

15,778,591

CASH AND CASH EQUIVALENTS, DECEMBER 31

$ 13,175,626

$

4,367,165

$ 17,542,791

RECONCILIATION OF CASH AND CASH EQUIVALENTS TO THE STATEMENT OF NET POSITION Cash and temporary investments Restricted cash

$ 12,685,126 490,500

$

4,367,165 -

$ 17,052,291 490,500

$ 13,175,626

$

4,367,165

$ 17,542,791

TOTAL CASH AND CASH EQUIVALENTS

The notes to the financial statements are an integral part of this statement.

-24-

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA STATEMENT OF CASH FLOWS - CONTINUED FOR THE YEAR ENDED DECEMBER 31, 2015 Electric RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income (loss) Adjustments to reconcile operating income (loss) to net cash provided by operating activities Other revenue related to operations Bad debt expense Depreciation (Increase) decrease in assets/deferred outflows: Accounts receivable Other receivables Special assessments receivable Due from other governments Inventories Prepaid expenses Deferred pension resources Increase (decrease) in liabilities/deferred inflows: Accounts payable Salaries and benefits payable Net other postemployment benefits liability Unearned revenue Compensated absences payable Due to other governments Customer deposits payable Net pension liability Deferred pension resources

$

Water

2,655,568

$

279,487 42,846 1,922,359

NET CASH PROVIDED BY OPERATING ACTIVITIES

Total

(211,758)

$

2,443,810

456,785 42,846 3,053,469

177,298 1,131,110

(127,006) 21,561 (1,079) 25,832 (12,434) (3,092) (272,949)

(10,734) 62,064 (25,697) 2,466 (670) (28,490)

(137,740) 83,625 (26,776) 25,832 (9,968) (3,762) (301,439)

244,041 (72,884) 8,109 71,274 10,716 37,314 (188,330) 459,746

58,761 (8,607) 12,660 (61,021) 276 52,742 (35,582) 47,987

302,802 (81,491) 8,109 12,660 10,253 10,992 90,056 (223,912) 507,733

$

5,101,079

$

1,162,805

$

6,263,884

$

17,181

$

818

$

17,999

Amortization of deferred charges on refunding

$

6,472

$

1,648

$

8,120

Contribution of capital assets

$

-

$

189,669

$

189,669

NONCASH CAPITAL AND RELATED FINANCING ACTIVITIES Amortization of bond premium

The notes to the financial statements are an integral part of this statement.

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ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Nature of the business The Elk River Municipal Utilities (the Utilities) is a municipal utility established by action of the City of Elk River (the City) pursuant to Minnesota statute 412.321 and consequently it’s Electric and Water funds are enterprise funds of the City. The Public Utilities Commission (the Commission) members are appointed by the City Council. The Commission determines all matters of policy. The Commission appoints personnel responsible for the proper administration of all affairs relating to the Utilities. The Utilities distributes electricity and water to the residents of Elk River, Dayton, Big Lake and Otsego, Minnesota. The Utilities has considered all potential units for which it is financially accountable, and other organizations for which the nature and significance of their relationship with the Utilities are such that exclusion would cause the Utilities’ financial statements to be misleading or incomplete. The Governmental Accounting Standards Board (GASB) has set forth criteria to be considered in determining financial accountability. These criteria include appointing a voting majority of an organization’s governing body, and (1) the ability of the primary government to impose its will on that organization or (2) the potential for the organization to provide specific benefits to, or impose specific financial burdens on the primary government. There are no component units. B. Measurement focus, basis of accounting and basis of presentation The accounts of the Utilities are organized and operated on the basis of funds. A fund is an independent fiscal and accounting entity with a self-balancing set of accounts. Fund accounting segregates funds according to their intended purpose and is used to aid management in demonstrating compliance with finance-related legal and contractual provisions. The minimum number of funds is maintained consistently with legal and managerial requirements. Revenue resulting from exchange transactions, in which each party gives and receives essentially equal value, is recorded on the accrual basis when the exchange takes place. Non-exchange transactions, in which the Utilities receives value without directly giving equal value in return, include property taxes, grants, entitlements and donations. Revenue from property taxes is recognized in the year for which the tax is levied. Revenue from grants, entitlements and donations is recognized in the year in which all eligibility requirements have been satisfied. Eligibility requirements include timing requirements, which specify the year when the resources are required to be used or the year when use is first permitted, matching requirements, in which the Utilities must provide local resources to be used for a specified purpose, and expenditure requirements, in which the resources are provided to the Utilities on a reimbursement basis. Grants and entitlements received before eligibility requirements are met are also recorded as unearned revenue. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Proprietary funds are accounted for on the flow of economic resources measurement focus and use the accrual basis of accounting. Under this method, revenues are recorded when earned and expenses are recorded at the time liabilities are incurred. Proprietary funds include the following fund type: Enterprise funds account for those operations that are financed and operated in a manner similar to private business or where the Utilities has decided that the determination of revenues earned, costs incurred and/or net income is necessary for management accountability. Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund’s principal ongoing operations. The principal operating revenues of the Water and Electric enterprise funds are charges to customers for sales and service. Operating expenses for enterprise funds include the cost of sales and services, administrative expenses and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses.

-27-

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED The Utilities reports the following major proprietary funds: The Electric fund accounts for the electric distribution operations. The Water fund accounts for the water distribution system. C. Assets, liabilities, deferred outflows of resources, deferred inflows of resources and net position Cash and cash equivalents The Utilities’ cash and cash equivalents are considered to be cash on hand, demand deposits and short-term investments with original maturities of three months or less from the date of acquisition. Cash balances from all funds are pooled and invested, to the extent available, in certificates of deposit and other authorized investments. Earnings from such investments are allocated on the basis of applicable participation by each of the funds. The Utilities may also invest idle funds as authorized by Minnesota statutes, as follows: 1.

Direct obligations or obligations guaranteed by the United States or its agencies.

2.

Shares of investment companies registered under the Federal Investment Company Act of 1940 and received the highest credit rating, rated in one of the two highest rating categories by a statistical rating agency, and have a final maturity of thirteen months or less.

3.

General obligations of a state or local government with taxing powers rated “A” or better; revenue obligations rated “AA” or better.

4.

General obligations of the Minnesota Housing Finance Agency rated “A” or better.

5.

Obligation of a school district with an original maturity not exceeding 13 months and (i) rated in the highest category by a national bond rating service or (ii) enrolled in the credit enhancement program pursuant to statute section 126C.55.

6.

Bankers’ acceptances of United States banks eligible for purchase by the Federal Reserve System.

7.

Commercial paper issued by United States banks corporations or their Canadian subsidiaries, of highest quality category by at least two nationally recognized rating agencies, and maturing in 270 days or less.

8.

Repurchase or reverse repurchase agreements and securities lending agreements with financial institutions qualified as a “depository” by the government entity, with banks that are members of the Federal Reserve System with capitalization exceeding $10,000,000, a primary reporting dealer in U.S. government securities to the Federal Reserve Bank of New York, or certain Minnesota securities broker-dealers.

9.

Guaranteed Investment Contracts (GIC's) issued or guaranteed by a United States commercial bank, a domestic branch of a foreign bank, a United States insurance company, or its Canadian subsidiary, whose similar debt obligations were rated in one of the top two rating categories by a nationally recognized rating agency.

Investments for the Utilities are reported at fair value.

-28-

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Accounts receivable Accounts receivable include amounts billed for services provided before year end. The Utilities has established a reserve for uncollectible accounts which is adjusted annually based on the receivable activity. No substantial losses from present receivable balances are anticipated. A summary of the uncollectible account balances at December 31, 2015 is as follows: 2015 Electric Water

$

109,845 26,250

Total

$

136,095

Interfund receivables and payables Transactions between funds that are representative of lending/borrowing arrangements outstanding at the end of the fiscal year are referred to as either “interfund receivables/payables” (i.e., the current portion of interfund loans) or “advances to/from other funds” (i.e., the non-current portion of interfund loans). All other outstanding balances between funds are reported as “due to/from other funds”. Inventories Inventories are stated at lower of average cost or market on the first-in, first-out (FIFO) method. Prepaid items Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items. Restricted assets The amounts in the restricted cash account are set aside in accordance with the issuing resolution for specific bond issues. They will be used for future debt service. Capital assets Capital assets are stated at cost. Capital assets are defined by the Utilities as assets with an initial individual cost of more than $5,000 and an estimated useful life in excess of two years. Expenditures for maintenance and repairs are charged to operations and expenditures that extend the useful life of the asset are capitalized and depreciated. When assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts and any gain or loss on disposition is included in operations. Major expenditures for improvements or capital asset projects are capitalized as projects are constructed. The Utilities follow the policy of providing depreciation on the straight-line method over the estimated useful lives of the assets, which are as follows: Lives in Years Electric Water

Description Production Transmission Distribution General Machinery, Tools, and Equipment Automobiles

4 - 20 30 10 - 33 10 - 50 5 - 10 3-8

-29-

25 - 50 25 - 50 10 - 50 5 - 10 3-8

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Deferred outflows of resources In addition to assets, the statement of financial position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to a future period(s) and so will not be recognized as an outflow of resources (expense/ expenditure) until then. The Utility has two items, a deferred charge on refunding and deferred pension resources, which qualify for reporting in this category. A deferred charge on refunding results from the difference in the carrying value of refunded debt and its reacquisition price. This amount is deferred and amortized over the shorter of the life of the refunded or refunding debt. Deferred pension resources result from actuarial calculation and current year pension contributions subsequent to the measurement date. Long-term obligations Long-term debt is reflected as a liability in the fund issuing the obligation. Bond premiums and discounts are amortized over the life of the bonds using the straight-line method. Bond issuance costs are reported as an expense in the period incurred. Compensated absences Vacation: All vacation benefits can be carried over from year to year and will be payable upon termination. Unused vacation carryover is limited to the number of hours accrued during the previous year. Sick Leave: Sick leave can be accumulated to a maximum of 960 hours from year to year. Upon termination or retirement, employees will have 50 percent of unused sick leave, up to a maximum of 960 hours, converted to cash and deposited into their Post Health Care Savings account. The liability for vacation and sick pay is reported as a liability in the respective funds at year end. Postemployment benefits other than pensions Under Minnesota statute 471.61, subdivision 2b., public employers must allow retirees and their dependents to continue coverage indefinitely in an employer-sponsored health care plan, under the following conditions: 1) Retirees must be receiving (or eligible to receive) an annuity from a Minnesota public pension plan, 2) Coverage must continue in group plan until age 65, and retirees must pay no more than the group premium, and 3) Retirees may obtain dependent coverage immediately before retirement. All premiums are funded on a pay-as-you-go basis. The liability was actuarially determined, in accordance with GASB Statement 45, at January 1, 2014. Pensions For purposes of measuring the net pension liability, deferred outflows/inflows of resources, and pension expense, information about the fiduciary net position of the Public Employees Retirement Association (PERA) and additions to/deductions from PERA’s fiduciary net position have been determined on the same basis as they are reported by PERA except that PERA’s fiscal year end is June 30. For this purpose, plan contributions are recognized as of employer payroll paid dates and benefit payments and refunds are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value.

-30-

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Performance Metrics and Incentive Compensation Through Utilities Performance Metric-based Incentive Compensation system (UPMIC) the Utilities employees will have an opportunity, as a group, to each earn a maximum of 2 percent of their total gross wage paid during the Measurement Period. The percentage of UMPIC is calculated using a Score Card. The Score Card has three categories: Safety, Reliability and Quality of Utility Services which are divided into various weighted factors. This incentive was created to help the Utilities to become more efficient and successful in meeting strategic goals and mission and deliver improved value to the Utilities customers. The liability at year end is recorded as part of accrued wages. Deferred inflows of resources In addition to liabilities, the statement of financial position and fund financial statements will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to a future period(s) and so will not be recognized as an inflow of resources (revenue) until that time. The Utility has only one type of item which qualifies for reporting in this category. The item, deferred pension resources, is reported only in the statements of net position and results from actuarial calculations. Net position Net position represents the difference between assets and liabilities and deferred inflows. Net position is displayed in three components: a.

Net investment in capital assets - Consists of capital assets, net of accumulated depreciation reduced by any outstanding debt attributable to acquire capital assets.

b.

Restricted net position - Consists of net position restricted when there are limitations imposed on their use through external restrictions imposed by creditors, grantors, laws or regulations of other governments.

c.

Unrestricted net position - All other net position that do not meet the definition of “restricted” or “net investment in capital assets”.

When both restricted and unrestricted resources are available for use, it is the Utilities’ policy to use restricted resources first, then unrestricted resources as they are needed.

-31-

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 2: DETAILED NOTES ON ALL FUNDS A. Deposits and investments Custodial credit risk for deposits and investments is the risk that in the event of a bank failure, the Utilities’ deposits and investments may not be returned or the Utility will not be able to recover collateral securities in the possession of an outside party. In accordance with Minnesota statutes and as authorized by the Commission, the Utility maintains deposits at those depository banks, all of which are members of the Federal Reserve System. Minnesota statutes require that all Utility deposits be protected by insurance, surety bond or collateral. The market value of collateral pledged must equal 110 percent of the deposits not covered by insurance, bonds, or irrevocable standby letter of credit from Federal Home Loan Banks. Authorized collateral in lieu of a corporate surety bond includes: •

United States government Treasury bills, Treasury notes, Treasury bonds;

•

Issues of United States government agencies and instrumentalities as quoted by a recognized industry quotation service available to the government entity;

•

General obligation securities of any state or local government with taxing powers which is rated “A” or better by a national bond rating service, or revenue obligation securities of any state or local government with taxing powers which is rated “AA” or better by a national bond rating service;

•

General obligation securities of a local government with taxing powers may be pledged as collateral against funds deposited by that same local government entity;

•

Irrevocable standby letters of credit issued by Federal Home Loan Banks to a municipality accompanied by written evidence that the bank’s public debt is rated “AA” or better by Moody’s Investors Service, Inc., or Standard & Poor’s Corporation; and

•

Time deposits that are fully insured by any federal agency.

Minnesota statutes require that all collateral shall be placed in safekeeping in a restricted account at a Federal Reserve Bank, or in an account at a trust department of a commercial bank or other financial institution that is not owned or controlled by the financial institution furnishing the collateral. The selection should be approved by the government entity. At December 31, 2015, the Utilities’ carrying amount of deposits was $14,012,796 and the bank balance was $14,035,614. Of the bank balance $500,000 was covered by federal depository insurance, and the remaining balance was covered by collateral held by the pledging financial institution’s agent in the Utilities’ name.

-32-

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 2: DETAILED NOTES ON ALL FUNDS - CONTINUED Investments The Utilities’ investment balances were as follows for December 31, 2015:

Types of Investments Pooled investments Broker Money Markets

Credit Quality/ Ratings (1)

Segmented Time Distribution (2)

N/A

less than 6 months

N/A N/A N/A

less than 6 months 6 months to 1 year 1 to 5 years

Non-pooled investments Brokered CD's Brokered CD's Brokered CD's

Fair Value and Carrying Amount $

32,695

707,701 1,097,667 1,691,132

Total non-pooled investments

3,496,500

Total investments

$

3,529,195

(1) Ratings were provided by various credit rating agencies where applicable to indicate associated credit risk. (2) Interest rate risk is disclosed using the segmented time distribution method. N/A Indicates not applicable or available. A reconciliation of cash and temporary investments as shown in the financial statements for the Utilities follows: 2015 Deposits Investments Cash on hand

$ 14,012,796 3,529,195 800

Total

$ 17,542,791

Cash and temporary investments Unrestricted Restricted

$ 17,052,291 490,500

Total

$ 17,542,791

The investments of the Utility are subject to the following risks: •

Credit Risk. Is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. Ratings are provided by various credit rating agencies and where applicable, indicate associated credit risk. Minnesota statutes and the Utilities’ investment policy limit the Utilities’ investments to the list on page 28 of the notes.

•

Custodial Credit Risk. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to a transaction, a government will not be able to recover the value of investment or collateral securities that are in the possession of an outside party. According to their investment policy the Utilities’ portfolio maturities shall be staggered to avoid undue concentration of assets with one broker-dealer or financial institution.

-33-

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 2: DETAILED NOTES ON ALL FUNDS - CONTINUED •

Concentration of Credit Risk. Is the risk of loss attributed to the magnitude of a government's investment in a single issuer. According to their investment policy the Utilities’ portfolio maturities shall be staggered to avoid undue concentration of assets in any one type of instrument.

•

Interest Rate Risk. Is the risk that changes in interest rates will adversely affect the fair value of an investment. According to their investment policy the Utilities’ will stagger maturities to avoid undue concentration of assets at a specific maturity sector.

B. Capital assets Capital asset activity for the year ended December 31, 2015 was as follows: Beginning Balance Capital assets not being depreciated Land Construction in progress Total capital assets not being depreciated Capital assets being depreciated Land improvements Buildings Machinery and equipment Infrastructure Total capital assets being depreciated Less accumulated depreciation for Land improvements Buildings Machinery and equipment Infrastructure Total accumulated depreciation Total capital assets being depreciated, net Business-type activities capital assets, net

$

361,303 815,710

Increases

$

48 1,650,484

Ending Balance

Decreases

$

(2,276,188)

$

361,351 190,006

1,177,013

1,650,532

(2,276,188)

551,357

23,389 3,674,600 3,218,436 73,233,475

29,815 419,949 3,232,782

(220,258) -

23,389 3,704,415 3,418,127 76,466,257

80,149,900

3,682,546

(220,258)

83,612,188

(14,453) (1,578,405) (1,636,356) (29,843,671)

(936) (110,884) (154,879) (2,786,770)

113,959

(15,389) (1,689,289) (1,791,235) (32,516,482)

(33,072,885)

(3,053,469)

113,959

(36,012,395)

(106,299)

47,599,793

(2,382,487)

$ 48,151,150

47,077,015

$ 48,254,028

-34-

629,077

$

2,279,609

$

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 2: DETAILED NOTES ON ALL FUNDS - CONTINUED Depreciation expense was charged to functions/programs of the Utilities as follows: 2015 Business-type Activities Water Electric

$ 1,131,110 1,922,359

Total depreciation expense - business-type activities

$ 3,053,469

C. Long-term debt General obligation revenue bonds The City of Elk River issues general obligation bonds to provide funds for the acquisition and construction of major capital facilities. The following bonds are to be paid out of Utilities’ revenues and are backed by the full faith and credit of the City.

Description G.O. Water Revenue Refunding Bonds of 2008 G.O. Capital Improvement Plan Bonds of 2010A

Authorized and Issued

Interest Rate

Issue Date

Maturity Date

Balance at Year End

$ 3,085,000

2.75 - 3.65 %

02/20/08

02/01/22

$ 1,695,000

2.00 - 4.00

04/21/10

08/01/23

840,000

1,265,000

Total G.O. Revenue Bonds

$ 2,535,000

The annual debt service requirements to maturity for the general obligation revenue bonds are as follows: Year Ending December 31,

Principal

2016 2017 2018 2019 2020 2021-2023

305,000 320,000 335,000 340,000 355,000 880,000

$

84,333 74,850 63,948 51,990 39,497 40,997

$ 2,535,000

$

355,615

$

Total

Interest

Total $

389,333 394,850 398,948 391,990 394,497 920,997

$ 2,890,615

The G.O. revenue bonds were issued to finance capital improvements and are to be repaid from future revenues pledged from the Water and Electric funds and are backed by the full faith and credit of the Utilities. In 2015, annual principal and interest payment on the bonds required about 13 percent of revenues from the Water fund. The principal and interest paid and total customer revenues for the Water fund were $295,079 and $2,202,537, respectively. In 2015, annual principal and interest payment on the bonds required about 0.3 percent of revenues from the Electric fund. The principal and interest paid and total customer revenues for the Electric fund were $97,760 and $32,551,722, respectively.

-35-

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 2: DETAILED NOTES ON ALL FUNDS - CONTINUED Revenue bonds The following bonds were issued to finance capital improvements in the Electric fund. They will be retired from net revenues of the fund.

Description Electric Revenue Bonds, Series 2007A Electric Revenue Refunding Bonds, Series 2014A

Authorized and Issued 2,875,000 2,030,000

Interest Rate

Issue Date

Maturity Date

Balance at Year End

4.00

03/28/07

02/01/22

$ 1,750,000

03/13/14

08/01/18

1,235,000

2.00-4.00

$ 2,985,000

Total Revenue Bonds

The annual debt service requirements to maturity for the revenue bonds are as follows: Year Ending December 31,

Principal

2016 2017 2018 2019 2020 2021-2022

$

Total

Interest

620,000 635,000 660,000 250,000 260,000 560,000

$

90,400 73,500 56,000 37,800 27,600 22,600

$ 2,985,000

$

307,900

Total $

710,400 708,500 716,000 287,800 287,600 582,600

$ 3,292,900

The revenue bonds were issued to finance the acquisition and construction of major capital facilities and are to be repaid from future revenues pledged from the Electric fund. In 2015, annual principal and interest payment on the bonds required about 2.2 percent of revenues from the Electric fund. Principal and interest paid and total customer revenues for the Electric fund were $710,600 and $32,551,722, respectively. Promissory note The Utilities has issued a promissory note to provide for construction of a landfill gas generator. The note is to be paid from revenue of the system and is secured by the facility.

Description Landfill Generator Note

Authorized and Issued $ 3,521,000

-36-

Interest Rate -%

Issue Date

Maturity Date

Balance at Year End

03/19/02

02/19/22

$ 1,408,368

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 2: DETAILED NOTES ON ALL FUNDS - CONTINUED The annual debt service requirements to maturity for the generator note are as follows: Year Ending December 31,

Principal

2016 2017 2018 2019 2020 2021-2022

$

Total

Interest

Total

194,307 195,216 198,252 200,916 203,952 415,725

$

-

$

194,307 195,216 198,252 200,916 203,952 415,725

$ 1,408,368

$

-

$ 1,408,368

Changes in long-term liabilities Long-term liability activity for the year ended December 31, 2015 was as follows: Beginning Balance Business-type activities Bonds payable General obligation revenue bonds Revenue bonds Unamortized premium on bonds Total bonds payable, net Notes payable Compensated absences payable Net pension liability GERF OPEB liability Business-type activity long-term liabilities

Decreases

Ending Balance

-

$ (300,000) (600,000)

$ 2,535,000 2,985,000

83,233

-

(17,999)

65,234

-

6,503,233

-

(917,999)

5,585,234

925,000

1,599,876

-

(191,508)

1,408,368

194,307

302,286

173,269

(163,016)

312,539

169,557

54,932

2,913,612 10,260

(436,368) (2,151)

2,477,244 63,041

-

$ 8,460,327

$ 3,097,141

$(1,711,042)

$ 9,846,426

$ 1,288,864

$ 2,835,000 3,585,000

Increases

$

*

Due Within One Year

$

* Includes 1/1/2015 pension liability balance related to GASB Statement No. 68 implementation. See Note 6 for further deatil.

-37-

305,000 620,000

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 2: DETAILED NOTES ON ALL FUNDS - CONTINUED D. Interfund receivables, payables and transfers The composition of interfund balances at year end is as follows: Receivable Fund Electric Electric Electric Electric Electric Electric Electric

Payable Fund City - General fund City - Nonmajor City - Nonmajor City - Sewer City - Garbage City - Storm Water City - General fund

Amount $

Total Electric fund receivable from City Water Water Water

94,703 439 128,850

Total Water fund receivable from City

City - General fund City - Nonmajor City - Nonmajor City - Nonmajor City - Sewer City - Garbage City - Stormwater

Electric Electric Electric Electric Electric Electric Electric

$

234,012

$

81,070 12,541 61,437 207,294 149,888 110,332 36,871

Shared costs Shared costs December transfer of 3% of revenue 4th quarter franchise fees Billed sewer on behalf of City Billed garbage on behalf of City Billed stormwater on behalf of City

659,433

Water

Total payable to City

Watermain project PERA aid TIF 22 Water Access Charge

223,992

Total Electric fund payable to City City - General fund

Sales tax/franchise fees Sales tax/franchise fees Supplies 4th quarter billings 4th quarter billings 4th quarter billings PERA aid

10,020

City - Nonmajor City - General fund City - Capital projects fund

Total receivable from City

1,710 70 1,910 1,003 1,809 1,762 1,756

Purpose

23,034 $

Shared costs

682,467

Interfund transfers completed in 2015 are detailed as follows:

Transfer out Electric Water Total transfers out

Transfer from Other City Funds

Transfer to Other City Funds

$

94,703

$

824,743 30,000

$

94,703

$

854,743

The transfer out of the Electric fund was the annual transfer of 3 percent of 2015 revenues to City funds. The transfer out of the Water fund was for its share of bonding. The transfer into the Water fund was for reimbursement related to the watermain project. -38-

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 3: DEFINED BENEFIT PENSION PLANS - STATEWIDE A. Plan description The Utilities participates in the following cost-sharing multiple-employer defined benefit pension plans administered by the Public Employees Retirement Association of Minnesota (PERA). PERA’s defined benefit pension plans are established and administered in accordance with Minnesota statutes, chapters 353 and 356. PERA’s defined benefit pension plans are tax qualified plans under Section 401 (a) of the Internal Revenue Code. General Employees Retirement Fund (GERF) All full-time and certain part-time employees of the Utilities are covered by the General Employees Retirement Fund (GERF). GERF members belong to either the Coordinated Plan or the Basic Plan. Coordinated Plan members are covered by Social Security and Basic Plan members are not. The Basic Plan was closed to new members in 1967. All new members must participate in the Coordinated Plan. B. Benefits provided PERA provides retirement, disability and death benefits. Benefit provisions are established by Minnesota statute and can only be modified by the state legislature. Benefit increases are provided to benefit recipients each January. Increases are related to the funding ratio of the plan. Members in plans that are at least 90 percent funded for two consecutive years are given 2.5 percent increases. Members in plans that have not exceeded 90 percent funded, or have fallen below 80 percent, are given 1 percent increases. The benefit provisions stated in the following paragraphs of this section are current provisions and apply to active plan participants. Vested, terminated employees who are entitled to benefits but are not receiving them yet are bound by the provisions in effect at the time they last terminated their public service. GERF benefits Benefits are based on a member’s highest average salary for any five successive years of allowable service, age, and years of credit at termination of service. Two methods are used to compute benefits for PERA's Coordinated and Basic Plan members. The retiring member receives the higher of a step-rate benefit accrual formula (Method 1) or a level accrual formula (Method 2). Under Method 1, the annuity accrual rate for a Basic Plan member is 2.2 percent of average salary for each of the first ten years of service and 2.7 percent for each remaining year. The annuity accrual rate for a Coordinated Plan member is 1.2 percent of average salary for each of the first ten years and 1.7 percent for each remaining year. Under Method 2, the annuity accrual rate is 2.7 percent of average salary for Basic Plan members and 1.7 percent for Coordinated Plan members for each year of service. For members hired prior to July 1, 1989, a full annuity is available when age plus years of service equal 90 and normal retirement age is 65. For members hired on or after July 1, 1989, normal retirement age is the age for unreduced Social Security benefits capped at 66. C. Contributions Minnesota statutes, chapter 353 sets the rates for employer and employee contributions. Contribution rates can only be modified by the state legislature. GERF contributions Basic Plan members and Coordinated Plan members were required to contribute 9.10 percent and 6.50 percent, respectively, of their annual covered salary in calendar year 2015. The Utilities was required to contribute 11.78 percent of pay for Basic Plan members and 7.50 percent for Coordinated Plan members in calendar year 2015. The Utilities contributions to the GERF for the years ending December 31, 2015, 2014 and 2013 were $230,074, $203,953 and $185,983, respectively. The Utilities contributions were equal to the contractually required contributions for each year as set by Minnesota statute.

-39-

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 3: DEFINED BENEFIT PENSION PLANS - STATEWIDE - CONTINUED D. Pension costs GERF pension costs At December 31, 2015, the Utilities reported a liability of $2,477,244 for its proportionate share of the GERF’s net pension liability. The net pension liability was measured as of June 30, 2015, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of that date. The Utilities proportion of the net pension liability was based on the Utilities contributions received by PERA during the measurement period for employer payroll paid dates from July 1, 2014 through June 30, 2015 relative to the total employer contributions received from all of PERA’s participating employers. At June 30, 2015, the Utilities proportionate share was 0.0478 percent which was a decrease of 0.0040 percent from its proportion measured as of June 30, 2014.

For the year ended December 31, 2015, the Utilities recognized pension expense of $212,456 for its proportionate share of GERF’s pension expense. At December 31, 2015, the Utilities reported its proportionate share of GERF’s deferred outflows of resources and deferred inflows of resources, and its contributions subsequent to the measurement date, from the following sources: Deferred Outflows of Resources Differences between expected and actual experience Changes in actuarial assumptions Net difference between projected and actual earnings on plan investments Changes in proportion Contributions to GERF subsequent to the measurement date

$

Total

$

Deferred Inflows of Resources

24,896 152,351

$

124,895

-

220,522 162,316

124,192

-

301,439

$

507,733

Deferred outflows of resources totaling $124,192 related to pensions resulting from the Utility’s contributions to GERF subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended December 31, 2016. Other amounts reported as deferred outflows and inflows of resources related to GERF pensions will be recognized in pension expense as follows: 2016 2017 2018 2019

$

-40-

(100,162) (100,162) (188,786) 58,624

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 3: DEFINED BENEFIT PENSION PLANS - STATEWIDE - CONTINUED E. Actuarial assumptions The total pension liability in the June 30, 2015 actuarial valuation was determined using the following actuarial assumptions: 2.75% per year 3.50% per year 7.90%

Inflation Active member payroll growth Investment rate of return

Salary increases were based on a service-related table. Mortality rates for active members, retirees, survivors and disabilitants were based on RP-2000 tables for males or females, as appropriate, with slight adjustments. Cost of living benefit increases for retirees are assumed to be: 1 percent effective every January 1st until 2034, then 2.5 percent for GERF. Actuarial assumptions used in the June 30, 2015 valuation were based on the results of actuarial experience studies. The experience study in the GERF was for the period July 1, 2004 through June 30, 2008, with an update of economic assumptions in 2014. Experience studies have not been prepared for PERA’s other plans, but assumptions are reviewed annually. There were no changes in actuarial assumptions in 2015. The long-term expected rate of return on pension plan investments is 7.9 percent. The State Board of Investment, which manages the investments of PERA, prepares an analysis of the reasonableness of the long-term expected rate of return on a regular basis using a building-block method in which best-estimate ranges of expected future rates of return are developed for each major asset class. These ranges are combined to produce an expected long-term rate of return by weighting the expected future rates of return by the target asset allocation percentages. The target allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table:

Target Allocation

Asset Class Domestic stocks International stocks Bonds Alternative assets Cash

45.00 % 15.00 18.00 20.00 2.00

Total

Long-term Expected Real Rate of Return 5.50 % 6.00 1.45 6.40 0.50

100.00 %

F. Discount rate The discount rate used to measure the total pension liability was 7.9 percent. The projection of cash flows used to determine the discount rate assumed that employee and employer contributions will be made at the rate specified in statute. Based on that assumption, each of the pension plan’s fiduciary net position was projected to be available to make all projected future benefit payments of current active and inactive employees. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability.

-41-

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 3: DEFINED BENEFIT PENSION PLANS – STATEWIDE – CONTINUED G. Pension liability sensitivity The following presents the Utilities proportionate share of the net pension liability for all plans it participates in, calculated using the discount rate disclosed in the preceding paragraph, as well as what the Utilities proportionate share of the net pension liability would be if it were calculated using a discount rate 1 percentage point lower or 1 percentage point higher than the current discount rate:

Utilities Proportionate Share of NPL 1 Percent Decrease (6.90%) GERF

$

3,895,108

1 Percent Increase (8.90%)

Current (7.90%) $

2,477,244

$

1,306,306

H. Pension plan fiduciary net position Detailed information about each defined benefit pension plan’s fiduciary net position is available in a separately-issued PERA financial report that includes financial statements and required supplementary information. That report may be obtained on the Internet at www.mnpera.org; by writing to PERA at 60 Empire Drive #200, St. Paul, Minnesota, 551032088; or by calling (651) 296-7460 or (800) 652-9026. Note 4: OTHER INFORMATION A. Territorial acquisition agreement In 1991, the Utilities entered into a 20 year agreement to transfer ownership of electric plant and electric service to customers in certain areas receiving electric service from Anoka Electric Cooperative, Inc. (AEC). In 2010 the Utility completed the final purchase under this agreement. The agreed cost of property purchased from AEC is net book value. The Utilities also pays AEC for loss of revenue for each area acquired based on a formula outlined in the agreement. In addition, the Utilities will compensate AEC for the loss of revenue from the future sale of electricity to electric customers in the areas acquired from AEC for a period of ten years from the date of sale of each individual area. The Utilities paid $211 in 2015, respectively, for loss of revenues under this agreement. All amounts paid are included in property and equipment. In 2015, the Utilities entered into a 10 year agreement to transfer ownership of electric plant and electric service to customers in eight designated areas receiving service from Connexus Energy. Specific payment terms have been negotiated for 5 years, and if any of the eight areas are not acquired within this timeframe, the payment terms may be renegotiated. The agreed cost of property purchased from Connexus Energy is net book value, integration expenses, and a loss of revenue payment. The loss of revenue payment for each area acquired is based on a formula outlined in the agreement, payable for the subsequent ten years after initial purchase. The Utilities acquired the first of the designated service areas in 2015 for $877,807. The first loss of revenue payment will be made in 2017. All amounts paid are included in property and equipment.

-42-

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 4: OTHER INFORMATION - CONTINUED B. Risk management The Utilities is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; errors and omissions; injuries to employees; and natural disasters for which the Utilities carries commercial insurance. The Utilities obtains insurance through participation in the League of Minnesota Cities Insurance Trust (LMCIT), which is a risk sharing pool with approximately 800 other governmental units. The Utilities pays an annual premium to LMCIT for its workers compensation and property and casualty insurance. The LMCIT is self-sustaining through member premiums and will reinsure for claims above a prescribed dollar amount for each insurance event. Settled claims have not exceeded the Utilities’ coverage in any of the past three fiscal years. Liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Liabilities, if any, include an amount for claims that have been incurred but not reported (IBNRs). The Utilities’ management is not aware of any incurred but not reported claims. C. Commitments The Utilities has received notice from their power supplier regarding the existing all requirements power contract exercising their right to give ten years notice to cancel the contract. The cancellation date would be effective September 30, 2018. On May 14, 2013 the Utilities signed a new agreement with Minnesota Municipal Power Agency (MMPA). The Utilities entered into an agreement in 2007 with Central Minnesota Municipal Power Agency (CMMPA) to acquire an interest in the CAPX Initiative Brookings Project, a power transmission line in Minnesota. The project is a 250 mile, 345 kV AC transmission line with a rating of 2,300 MW, between Brookings, South Dakota, and the Southeast Twin Cities. In 2011 there was increased opportunity for investment, and subsequent agreements provide the Utilities with an ownership share of $5.6 million or 18.89 percent. The return on this investment through CMMPA is designed to provide approximately $124,000 annually over the 40 year project life. The transmission payments for 2015 were $42,532 of which $24,353 was receivable at December 31, 2015. Note 5: POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS Plan Description. Elk River Municipal Utilities (the Utilities) administers a multi-employer defined benefit healthcare plan (“the Retiree Health Plan”). The plan provides lifetime healthcare insurance for eligible retirees and their spouses through the Utilities group health insurance plan, which covers both active and retired members. Benefit provisions are reviewed intermittently through the relationship with the Utilities’ insurance broker. The Retiree Health Plan does not issue a publicly available financial report. Funding Policy. Contribution requirements also are reviewed at the time changes are made to the plan. The Utility contributes none of the cost of current-year premiums for eligible retired plan members and their spouses. For fiscal year 2015, the Utility contributed $0 to the plan. Plan members receiving benefits contribute 100 percent of their premium costs. In fiscal year 2015, total member contributions were $0. Annual OPEB Cost and Net OPEB Obligation. The Utilities’ annual other postemployment benefit (OPEB) cost (expense) is calculated based on the annual required contribution of the employer (ARC). The Utility has elected to calculate the ARC and related information using the alternative measurement method permitted by GASB Statement 45 for employers in plans with fewer than one hundred total plan members. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and to amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. The following table shows the components of the Utilities annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the Utilities’ net OPEB obligation to the Retiree Health Plan:

-43-

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 5: POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS - CONTINUED Annual required contribution Interest on net OPEB obligation Adjustment to annual required contribution

$

Annual OPEB Cost (expense)

11,240 2,197 (3,177) 10,260

Contributions made Direct (explicit) subsidy Implicit subsidy

(2,151)

Increase in net OPEB obligation

8,109

Net OPEB obligation - beginning of year

54,932

Net OPEB obligation - end of year

$

63,041

The Utilities’ annual OPEB cost, the amount and percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for December 31, 2015 and the preceding two fiscal years was as follows:

Year Ending 12/31/2015 12/31/2014 12/31/2013

Annual OPEB Cost $

10,260 9,890 6,073

Three Year Trend Information Percentage Annual OPEB Employer Contributed Contribution $

2,151 1,391

21 % 23

Net OPEB Obligation 63,041 54,932 45,042

Funded Status and Funding Progress. As of December 31, 2014, the actuarial accrued liability for benefits was $68,948, all of which was unfunded. The covered payroll (annual payroll of active employees covered by the plan) was $2,810,413 and the ratio of the unfunded actuarial accrued liability to the covered payroll was 2.50 percent. The projection of future benefit payments for an ongoing plan involves estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multi-year trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. Methods and Assumptions. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations.

-44-

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 5: POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS - CONTINUED The following simplifying assumptions were made: Retirement age for active employees - Based on the historical average retirement age for the covered group, active plan members were assumed to retire at age 60, or at the first subsequent year in which the member would qualify for benefits. Participation Rate - It is assumed that 10 percent of active participants continue coverage until age 65. Participants are assumed to continue in their current coverage type (single or family). It is assumed that 100 percent of retirees will continue their current coverage until age 65. Life Expectancy - Life expectancies were based on mortality tables from the National Center for Health Statistics. The 2000 United States Life Tables for Males and for Females were used. Turnover - Non-group-specific age-based turnover data from GASB Statement 45 were used as the basis for assigning active members a probability of remaining employed until the assumed retirement age and for developing an expected future working lifetime assumption for purposes of allocating to periods the present value of total benefits to be paid. Healthcare cost trend rate - The expected rate of increase in healthcare insurance premiums was based on projections of the Office of the Actuary at the Centers for Medicare & Medicaid Services. A rate of 7.5 percent initially, reduced to an ultimate rate of 5.0 percent after eight years, was used. Health insurance premiums - 2014 health insurance premiums for retirees were used per the valuation report. Withdrawal - The probability that an employee will remain employed until the assumed retirement age was determined using non-group specific age-based turnover data provided in Table 1 in Paragraph 35b of GASB 45. Disability - None Actuarial Method - Projected Unit Credit with 30-year amortization of the unfunded liability. Valuation date - January 1, 2014 Based on the historical and expected returns of the Utilities’ short-term investment portfolio, a discount rate of 4.0 percent was used. In addition, a simplified version of the entry age actuarial cost method was used. The unfunded actuarial accrued liability is being amortized as a level dollar amount over an open basis. The remaining amortization period at December 31, 2014 was thirty years.

-45-

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2015 Note 6: CHANGE IN ACCOUNTING STANDARDS During 2015, the Utilities implemented several new accounting pronouncements issued by the Governmental Accounting Standards Board (GASB), including Statement No. 68, Accounting and Financial Reporting for Pensions - an Amendment of GASB Statement No. 27 and Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date - an Amendment of GASB Statement No. 68, for the year ended December 31, 2015. These standards required a retroactive implementation which resulted in the restatement of beginning balances in the December 31, 2014 financial statements. Changes related to these standards are reflected in the financial statements and schedules and related disclosures are included in Note 3. As a result of the restatement of beginning balances, the following schedule reconciles the previously reported December 31, 2014 balances to the December 31, 2015 financial statements: December 31, 2015 Net Position January 1, 2015 as Previously Reported

Fund Business-type activities Electric Water Total business-type activities

Prior Period Restatement (1)

Net Position January 1, 2015 as Restated

$

32,969,053 23,086,536

$

(2,431,445) (269,711)

$

30,537,608 22,816,825

$

56,055,589

$

(2,701,156)

$

53,354,433

(1) To record beginning net pension liability and deferred outflow of resources at December 31, 2014.

-46-

REQUIRED SUPPLEMENTARY INFORMATION ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA

FOR THE YEAR ENDED DECEMBER 31, 2015

-47-

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA REQUIRED SUPPLEMENTARY INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2015 Schedule of funding progress for the retiree health plan

Actuarial Valuation Date 12/31/2014 12/31/2011 12/31/2008

Actuarial Value of Assets $

Unfunded Actuarial Accrued Liability (UAAL)

Actuarial Accrued Liability -

$

68,948 42,681 56,892

$

Funded Ratio

68,948 42,681 56,892

-

Covered Payroll %

$ 2,810,413 2,286,547 2,300,000

UAAL as a Percentage of Covered Payroll 2.50 % 1.87 2.47

Schedule of employer’s share of PERA net pension liability - General Employees Retirement Fund Required Supplementary Information

Fiscal Year Ending

Utilities Proportion of the Net Pension Liability

06/30/15

0.0478 %

Utilities Proportionate Share of the Net Pension Liability (a)

Utilities Proportionate Share of the Net Pension Liability Associated with the City (b)

$

$

2,477,244

-

Utilities Proportionate Share of the Net Pension Liability as a Percentage of Covered Payroll ((a+b)/c)

Total (a+b)

Utilities Covered Payroll (c)

$ 2,477,244

$ 3,067,653

80.8 %

Plan Fiduciary Net Position as a Percentage of the Total Pension Liability 78.7 %

Schedule of employer’s PERA contributions - General Employees Retirement Fund

Statutorily Required Contribution (a)

Year Ending 12/31/15

$

230,074

Required Supplementary Information Contributions in Relation to the Utilities Statutorily Contribution Required Deficiency Covered Contribution (Excess) Payroll (b) (a-b) (c) $

230,074

$

-48-

-

$

3,067,653

Contributions as a Percentage of Covered Payroll (b/c) 7.5 %

SUPPLEMENTARY INFORMATION ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA

FOR THE YEAR ENDED DECEMBER 31, 2015

-49-

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA SUPPLEMENTARY INFORMATION SCHEDULE OF OPERATING REVENUES AND EXPENSES FOR THE YEAR ENDED DECEMBER 31, 2015 Electric OPERATING REVENUES Charges for services Elk River Otsego Big Lake Dayton Security systems LFG Project Generation credit Connection maintenance Customer penalties

$ 28,833,769 2,377,276 190,727 227,359 251,488 1,075,148 (805,579) 163,195 238,339

TOTAL OPERATING REVENUES OPERATING EXPENSES Purchased power Production Supervision and labor Natural gas Supplies and power for pumping Landfill gas expense Maintenance of structures Maintenance of equipment Maintenance of plant Total Transmission and distribution Supervision and labor Maintenance of overhead lines Maintenance of underground lines Maintenance of station equipment Transportation Maintenance of customer service Maintenance of customer meters Miscellaneous Total Services to City Depreciation Customer accounts expense Meter reading Billing and collection Bad debts Total

-50-

Water

$

Total

2,141,096 42,543 18,898

$ 30,974,865 2,377,276 190,727 227,359 251,488 1,075,148 (805,579) 205,738 257,237

32,551,722

2,202,537

34,754,259

22,034,307

-

22,034,307

57,646 47,185 52,780 704,577 37,945 11,902 16,888

20,944 266,474 35,767 141,996 -

78,590 47,185 319,254 704,577 73,712 153,898 16,888

928,923

465,181

1,394,104

24,772 397,124 167,637 62,536 135,339 7,169 83,765 523,704

10,143 16,676 73,061 68,230 22

34,915 397,124 167,637 62,536 152,015 80,230 151,995 523,726

1,402,046

168,132

1,570,178

520,727

5,719

526,446

1,922,359

1,131,110

3,053,469

36,808 255,695 42,846

1,650 60,118 -

38,458 315,813 42,846

335,349

61,768

397,117

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA SUPPLEMENTARY INFORMATION SCHEDULE OF OPERATING REVENUES AND EXPENSES - CONTINUED FOR THE YEAR ENDED DECEMBER 31, 2015 Electric OPERATING EXPENSES - CONTINUED General and administrative Salaries Employee pensions and benefits Dues Office supplies and billing expense Office utilities and maintenance Consulting fees Legal and audit Environmental compliance Conservation improvement project Insurance Telephone Advertising Education and meetings Miscellaneous

$

Total TOTAL OPERATING EXPENSES OPERATING INCOME (LOSS)

659,318 1,267,179 91,613 144,234 21,102 36,842 43,446 24,208 67,697 174,161 26,997 7,155 127,400 61,091

TOTAL NONOPERATING REVENUES (EXPENSES)

INCOME (LOSS) BEFORE CONTRIBUTIONS AND TRANSFERS CAPITAL CONTRIBUTIONS DEVELOPER INFRASTRUCTURE AND CONNECTION FEES CONTRIBUTION OF ASSETS FROM CITY TRANSFERS FROM OTHER CITY FUNDS TRANSFERS TO OTHER CITY FUNDS CHANGE IN NET POSITION NET POSITION, JANUARY 1 AS RESTATED (NOTE 6) NET POSITION, DECEMBER 31

-51-

$

147,926 265,605 42,984 32,270 8,948 8,292 8,763 28,116 6,797 3,406 20,612 8,666

Total

$

807,244 1,532,784 134,597 176,504 30,050 36,842 51,738 24,208 76,460 202,277 33,794 10,561 148,012 69,757

2,752,443

582,385

3,334,828

29,896,154

2,414,295

32,310,449

2,655,568

NONOPERATING REVENUES (EXPENSES) Interest income Miscellaneous revenue Interest expense and other Gain (loss) on sale of capital assets

Water

(211,758)

2,443,810

95,533 279,487 (116,676) 8,899

24,666 177,298 (65,135) -

120,199 456,785 (181,811) 8,899

267,243

136,829

404,072

2,922,811

(824,743)

(74,929)

253,934 189,669 94,703 (30,000)

2,847,882

253,934 189,669 94,703 (854,743)

2,098,068

433,377

2,531,445

30,537,608

22,816,825

53,354,433

$ 32,635,676

$ 23,250,202

$ 55,885,878

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA ELECTRIC FUND SUMMARY OF OPERATIONS AND UNAUDITED STATISTICS FOR THE YEARS ENDED DECEMBER 31, 2007 THROUGH DECEMBER 31, 2015 SUMMARY OF OPERATIONS OPERATING REVENUES Sales of electricity Other operating revenues (expenses)

2007

2008

2009

$ 19,164,797 501,746

$ 22,303,994 637,909

$ 23,591,485 636,258

19,666,543

22,941,903

24,227,743

12,176,034 1,829,971 358,029 1,920,798 1,977,973

14,778,270 2,162,797 409,222 2,057,851 2,196,770

16,161,444 1,937,096 428,508 2,126,794 2,272,917

18,262,805

21,604,910

22,926,759

1,403,738

1,336,993

1,300,984

TOTAL OPERATING REVENUES OPERATING EXPENSES Purchased power Distribution Services to the City Depreciation Other operating expenses TOTAL OPERATING EXPENSES OPERATING INCOME TRANSFERS FROM OTHER CITY FUNDS TRANSFERS TO OTHER CITY FUNDS NONOPERATING REVENUES

(483,000) 710,858

NET INCOME

$

PERCENT OF CHANGE Sales of electricity Purchased power PERCENT OF REVENUES Purchased power

1,631,596

(540,636) 249,022 $

1,045,379

(585,141) (146,352) $

569,491

16.185%

16.380%

5.772%

20.530%

21.372%

9.360%

61.912%

64.416%

66.706%

UNAUDITED STATISTICS MISCELLANEOUS

KWh's purchased KWh's sold

2007

2008

2009

$ 225,973,086 211,298,886

$ 241,837,173 224,226,048

$ 247,595,137 232,772,722

14,674,200

17,611,125

14,822,415

Line loss Percent of line loss

6.494%

7.282%

5.987%

REVENUES PER KWh SOLD

$

0.0907

$

0.0995

$

0.1013

COST PER KWh PURCHASED

$

0.0539

$

0.0611

$

0.0653

NUMBER OF CUSTOMERS

8,945

TOTAL CONTRIBUTION/TRANSFERS TO CITY

$

-52-

483,000

9,203 $

540,636

9,170 $

585,141

2010

2011

2012

2013

2014

2015

$ 26,060,301 732,261

$ 27,894,341 689,645

$ 30,070,045 188,645

$ 30,978,790 (132,411)

$ 31,514,246 (147,561)

$ 32,704,279 (152,557)

26,792,562

28,583,986

30,258,690

30,846,379

31,366,685

32,551,722

18,373,386 1,892,212 434,415 2,062,942 2,399,236

19,604,951 1,960,742 474,934 2,041,717 2,350,706

20,499,773 1,909,845 481,907 2,099,594 2,359,193

21,254,950 1,970,341 498,146 2,029,496 2,374,959

21,994,652 2,161,352 530,340 1,914,062 2,791,717

22,034,307 2,330,969 520,727 1,922,359 3,087,792

25,162,191

26,433,050

27,350,312

28,127,892

29,392,123

29,896,154

1,630,371

2,150,936

2,908,378

2,718,487

1,974,562

2,655,568

53,741 (657,086) (154,956) $

872,070

(711,415) (105,604) $

1,333,917

(816,864) 28,531 $

2,120,045

(781,162) (30,658) $

1,906,667

(797,835) 152,375 $

1,329,102

(824,743) 267,243 $

2,098,068

10.465%

7.038%

7.800%

3.022%

1.728%

3.776%

13.687%

6.703%

4.564%

3.684%

3.480%

0.180%

68.576%

68.587%

67.748%

68.906%

70.121%

67.690%

2010

2011

2012

2013

2014

2015

$ 264,642,834 250,711,834

$ 276,026,892 261,235,297

$ 287,553,108 273,455,846

$ 290,025,919 273,945,354

$ 288,320,724 274,546,059

$ 294,441,957 282,265,268

13,931,000

14,791,595

14,097,262

16,080,565

13,774,665

12,176,689

5.264%

5.359%

4.902%

5.545%

4.778%

4.136%

$

0.1039

$

0.1068

$

0.1100

$

0.1131

$

0.1148

$

0.1159

$

0.0694

$

0.0710

$

0.0713

$

0.0733

$

0.0763

$

0.0748

9,207 $

657,086

9,227 $

711,415

9,285 $

816,864

9,358 $

781,162

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9,449 $

797,835

10,499 $

824,743

ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA WATER FUND SUMMARY OF OPERATIONS AND UNAUDITED STATISTICS FOR THE YEARS ENDED DECEMBER 31, 2007 THROUGH DECEMBER 31, 2015 SUMMARY OF OPERATIONS 2007 OPERATING REVENUES Sales of water

$

OPERATING EXPENSES Operating expenses less depreciation Services to City Depreciation TOTAL OPERATING EXPENSES TOTAL OPERATING INCOME (LOSS)

2,113,166

$

2009

2,130,124

$

2,206,429

1,191,346 921,450

1,185,413 974,848

1,102,437 956,993

2,112,796

2,160,261

2,059,430

$

PERCENT OF CHANGE Sales of water

2008

370

$

20.76%

(30,137)

$

0.80%

146,999

3.58%

UNAUDITED STATISTICS MISCELLANEOUS 2007

2008

2009

WATER PUMPED (gallons)

873,742,000

854,133,000

782,951,000

WATER SOLD (gallons)

783,948,000

727,029,000

708,286,000

10.28%

14.88%

9.54%

Percent of line loss Revenues per 1,000 gallons pumped

$

2.41

$

2.48

$

2.81

Revenues per 1,000 gallons sold

$

2.70

$

2.93

$

3.12

Number of customers

4,413

4,508

4,467

WATER SUPPLIER SERVICES

Flushing hydrants Back washing Fire department use New water main disinfectant and flushing Flushing seasonal well Meter inaccuracy Street and Sewer Maintenance Water tower paint and clean/maintenance Well maintenance Water line and irrigation leaks Frozen pipes bursting in abandoned homes Water Supplier Services

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2007

2008

2009

$ 27,000,000 8,400,000 1,000,000 1,000,000 -

$ 30,000,000 8,400,000 5,000,000 2,000,000 25,000,000

$ 33,000,000 8,400,000 1,000,000 2,000,000 1,300,000 27,000,000

37,400,000

70,400,000

72,700,000

2010 $

$

2011

1,913,661

$

2012

1,832,817

$

2013

2,265,142

$

2014

2,278,124

$

2015

2,148,327

$

2,202,537

989,736 955,323

1,008,562 980,197

1,130,965 1,028,593

1,210,797 1,032,442

1,267,019 1,083,770

1,277,466 5,719 1,131,110

1,945,059

1,988,759

2,159,558

2,243,239

2,350,789

2,414,295

(31,398)

$

(13.27%)

(155,942)

$

(4.22%)

2010

105,584

$

34,885

23.59%

2011

$

0.57%

2012

(202,462)

$

(5.70%)

2013

(211,758)

2.52%

2014

2015

686,289,000

651,907,000

847,283,200

785,377,000

782,110,000

799,974,000

627,209,000

599,701,000

727,912,000

709,760,000

672,760,000

676,842,000

8.61%

8.01%

14.09%

9.63%

13.98%

15.39%

$

2.79

$

2.81

$

2.67

$

2.90

$

2.75

$

2.75

$

3.05

$

3.06

$

3.11

$

3.21

$

3.19

$

3.25

4,511

4,515

4,542

4,613

4,676

4,762

2010

Gallons 2011

2012

2013

2014

2015

$ 35,000,000 9,000,000 3,000,000 3,000,000 4,000,000 5,000,000

$ 34,000,000 8,000,000 4,000,000 4,000,000 2,000,000 -

$ 46,400,000 30,000,000 16,500,000 9,000,000 3,600,000 6,500,000 7,000,000 -

$ 45,000,000 8,000,000 5,000,000 5,000,000 3,000,000 617,000 2,000,000 7,000,000 -

$ 47,000,000 3,922,000 5,000,000 5,000,000 3,000,000 1,000,000 1,000,000 7,000,000 -

$ 45,000,000 4,000,000 5,000,000 5,000,000 473,400 3,700,000 700,000 -

59,000,000

52,000,000

119,000,000

75,617,000

72,922,000

63,873,400

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THIS PAGE IS LEFT BLANK INTENTIONALLY

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OTHER REPORT ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA

FOR THE YEAR ENDED DECEMBER 31, 2015

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THIS PAGE IS LEFT BLANK INTENTIONALLY

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INDEPENDENT AUDITOR’S REPORT ON MINNESOTA LEGAL COMPLIANCE

Public Utilities Commission Elk River Municipal Utilities Elk River, Minnesota We have audited, in accordance with auditing standards generally accepted in the United States of America, the financial statements of Elk River Municipal Utilities (the Utilities) of the City of Elk River, Minnesota (the City) as of and for the year ended December 31, 2015, and the related notes to the financial statements, and have issued our report thereon dated March 31, 2016. The Minnesota Legal Compliance Audit Guide for Cities, promulgated by the State Auditor pursuant to Minnesota Statute §6.65, contains seven categories of compliance to be tested: contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, claims and disbursements, miscellaneous provisions, and tax increment financing. Our audit considered all of the listed categories, except that we did not test for compliance with the provisions for tax increment financing because the Utilities has not established a tax increment financing district. In connection with our audit, nothing came to our attention that caused us to believe that the Utilities’ failed to comply with the provisions of the Minnesota Legal Compliance Audit Guide for Cities. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance. Accordingly, had we performed additional procedures, other matters may have come to our attention regarding the Utilities’ noncompliance with the above referenced provisions. This report is intended solely for the information and use of the Public Utilities Commission, City Council, management and the Office of the State Auditor and is not intended to be and should not be used by anyone other than these specified parties.

ABDO, EICK & MEYERS, LLP Minneapolis, Minnesota March 31, 2016

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